You are financially more than your credit score

You are financially more than your credit score

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Credit Sesame asked six regular contributors to Sesame Speaks, the Credit Sesame blog, to comment on the statement, “You are financially more than your credit score.”

Your credit score is just one piece of information that lenders use

Your credit score is a snapshot of your credit history and how you have managed debt in the past. Although important, it is not the only component that lenders consider when evaluating your applications for loans or credit cards. Other financial factors include your income, debt-to-income ratio, employment history, and savings and investment balances. Building an emergency fund, creating a budget and sticking to it, and consistently saving for the future can all demonstrate your financial responsibility and stability. Additionally, having a diverse mix of assets, such as stocks, bonds, and real estate, can show lenders that you have a well-rounded and responsible approach to managing your finances. Remember, your credit score is just one piece of information that lenders use to evaluate you. By taking control of your overall financial picture, you can increase your chances of being approved for credit and achieving your financial goals. Katrina Boydon

Debt, not credit score, can be a bigger burden on your finances

Your credit score is important in helping you get good credit rates on loans and credit cards, but it’s not the end-all for how your financial life plays out. Debt is very important also. Some debt is good debt. A home loan, for instance, can help you buy a place to live and create wealth for you and your family. Household wealth among homeowners is 1,469% higher on average compared to renters, excluding home equity, according to iProperty Management. To put that in dollars, the average homeowner has $95,500 in household wealth when home equity is excluded, compared to $6,270 for renters. Add in home equity, and homeowners have $254,900. Car and student loans can also be considered good debt. But other debts can be a burden for years. The average American had $5,525 in credit card debt in 2021. A credit card with that balance at an interest rate of 15% will take four years to pay off if you make a monthly payment of $150. You’d end up paying $1,924 in total interest. Taking four years to pay off such a debt leaves you less money to spend on Christmas gifts, vacations and emergencies, among other things. You may not contribute to your retirement account either. Debt, not a credit score, can be a bigger burden on your finances. Aaron Crowe

Think of your credit score as a snapshot in time

Think of your credit score as a snapshot in time. Whether you’re a great money manager or you’re just beginning your journey, there’s always hope ahead. If your score is lower than you’d like, consider this good news: You recognize that you want it to be higher! That’s the first step to take. The next is to set a goal. Where would you like to be? What steps will you take to get there? You might want to pay down a debt, get current on payments or take out a new loan to add variety to your credit mix. Write down from one to three steps you’ll take next. Add a date when you anticipate being able to take those steps. Then, get to work! If you’ve got a mid-range credit score or even a high one, be proud of where you’re at. Keep looking for ways to be a better money manager. Put those good habits to work and share them with others when you have the chance. Even if your credit score is stellar, it’s simply a reflection of all the great things you’re doing outside of this number. You are living life, pursuing dreams and enjoying the reward of attending to the details. Keep up the great work! Nate Birt

Your credit score only tells part of the story

Your credit score provides important insight to your financial health and habits. However, it only tells part of the story. After all, there’s a reason they call it a “credit score.” It focuses on your history of using credit – how much you’ve borrowed in the past, how reliably you’ve made payments and how much you now owe. That’s important information, but it leaves out three other key pieces of your financial story:

  • Income. Your earning power now and over the remainder of your career determines what kind of lifestyle you can afford currently, and how much you can save for the future.
  • Expenses. If spending isn’t kept in line with your income, you will never get ahead.
  • Net worth. The amount of wealth you accumulate over time, net of any debt you have, measures the overall financial progress you have made.

The above three aspects of financial health are related to credit history in a similar way that all four legs on a table are related. Each must be sturdy in order for your finances to rest on a stable platform. If you have a problem with any one of the four legs, the whole thing can collapse. Richard Barrington

A high credit score doesn’t automatically guarantee approval

When you apply for credit, a high credit score doesn’t automatically guarantee approval. And a low-ish score doesn’t necessarily doom your application. Lenders understand that your financial picture is a complex combination of strengths and weaknesses. Credit scores tell prospective lenders how much you’ve borrowed in the past and how well you honored your obligation to repay it. They also incorporate how much you currently owe. But credit scoring models don’t include the amount or stability of your income, which determines your ability to repay a loan. That’s why lenders ask for a work history — they want to see stable and predictable income.  The relationship between your income and debts — your debt-to-income ratio or DTI — is also critical for lending decisions. To calculate a DTI, lenders add your debt payments to your monthly mortgage or rent and divide that by your monthly gross (before-tax) income. The lower your DTI, the better. Loan approval can get tricky when your DTI exceeds 36% and becomes especially difficult over 50%. Gina Freeman

It’s possible to feel overconfident when you have a good credit score

Checked your credit score lately? If your three-digit score is lower than desired, don’t get discouraged. First, know that there are action steps you can take to improve your score and, consequently, your creditworthiness. Second, your credit score isn’t the only measure of your financial well-being. Yes, it’s true that having a preferred credit score is needed if you want to be eligible for a wider array of loans, credit cards, and other borrowing vehicles and qualify for lower interest rates and better terms. But it’s possible to have a credit score that others would envy and still not necessarily have money matters under control. It’s also possible to feel overconfident when you have a good credit score. You may end up applying for and using new credit without having sufficient earnings or savings to pay back your debt. Indeed, a good credit score isn’t a reliable barometer of your total financial state. For example, you may have few dollars socked away in savings, a lack of total assets to fall back on, and a tendency to overspend and mismanage money. These and other factors can be a stronger indicator of your fiscal health. Erik J. Martin

Keep your score as high as possible for good financial reasons

About 1.6% of Americans may think that you are not more than your credit score. At least, that’s the proportion that invests the considerable time and effort required to maintain a perfect FICO score of 850. Why would they do that if they didn’t reckon that these scores are hugely important? Perhaps most of us recognize that having a high score is a useful financial tool — and only that. You could save tens of thousands, perhaps hundreds of thousands of dollars over your entire life by having an excellent score compared to a poor one. That’s because one of those reduces the interest you pay across all your borrowing. However, credit scores do not reflect your moral fiber. While having a high score proves that you’re good at managing your borrowing, having a low one doesn’t necessarily suggest the opposite. Many people have poor credit simply because they haven’t borrowed much recently or ever. And even those whose scores are low as a result of previous “bad” behavior are often entirely innocent. Luck plays a huge role. Redundancy, short working hours, long and expensive illnesses … all these and more can ruin a credit score while leaving the survivor faultless. Keep your score as high as possible for good financial reasons. But don’t judge others with lower ones. Peter Warden

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Katrina Boydon
Katrina Boydon has been consulting in web content and media operations for over 20 years. When she’s not strategising, devising topics, editing or managing distribution, she likes to put fingers to keyboard and create original articles on a range of topics.

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